Monday 18 May 2009 13.35 EDT
First published on Monday 18 May 2009 13.35 EDT

The film director Woody Allen and the clothing magnate Dov Charney of American Apparel today avoided a potentially bruising encounter over a complaint of breach of copyright after they reached a settlement on the steps of a New York court.

Under the deal, Allen will receive $5m (£3.3m) in damages for the unauthorised use of his image in a billboard advertising campaign for American Apparel last year. The settlement - which amounts to half of the sum Allen had demanded - spares both men the public humiliation of a trial that had been expected to last up to a month.

The legal action had pitted two strikingly similar public figures against each other. Allen initially demanded $10m in damages for use of his image in breach of his longstanding refusal to endorse commercial interests.

He objected to the use of his picture in the Los Angeles-based company's billboards, which showed him dressed in Hasidic Jewish clothing above the American Apparel logo and the words "the holy rebbe" in Yiddish.

Charney protested in his defence that the billboards had only been up for a week in a few streets of New York and Los Angeles. He insisted that he had no commercial ambitions in putting up the posters but rather had wanted to make a social comment about the similarity in the way that both he and Allen had been treated at the hands of the media.

Both men have been subjects of controversies of a sexual nature. Allen was embroiled in a long fight with his former partner Mia Farrow after he began an affair with her adopted daughter Soon-Yi Previn whom the film director has since married.

Charney has been involved in several highly publicised sexual harassment suits brought by former employees, none of which were proven.

In a statement, Charney said it was ironic that he now found himself having to explain to Allen the meaning of the joke behind the billboards.

By making an allusion to the film Annie Hall, from which the image of Allen was taken, he intended to comment about tabloid scandal-mongering. The specific scene of the film shows Allen in the role of Alvy Singer at a dinner hosted by Annie Hall's non-Jewish family. The character feels so out of place at the table that he imagines himself as an Hasidic Jew.

Charney said his idea was to use that personification of discomfort as a metaphor for what he and his company were going through at the time during the sexual harassment lawsuits.

"The billboards were designed to inspire dialogue. They were certainly never intended to sell clothes," he said.

The deal with Allen was secured by American Apparel's insurers, from whom Charney disassociated himself saying they were responsible for the decision to settle. The insurers had presumably been mindful of the fact that US courts rarely show sympathy in breach of copyright cases to commercial entities.

Judges are much more likely to be swayed by freedom of speech arguments under the first amendment when the defendant is an individual rather than a business.